By Tiernan Ray

UBS’s Nicolas Gaudois today reiterates a Buy rating on shares of Samsung Electronics (005930KS), and a ₩2,200,000 price target, writing that a 2.7% decline this year could reverse itself based on strong sell-through trends of its recently released Galaxy S4 smartphone, which runs Google‘s (GOOG) Android operating system.

Samsung shares today slipped fractionally in Seoul trading to close at ₩1,481,000.

The issue is the apparent decline in gross margin for the S4 versus the predecessor Galaxy S III, writes Gaudois, with initial estimates suggesting a decline on higher component costs, though he hasn’t yet conducted a detailed bill-of-materials analysis via teardown:

Initial analyses show an increase in the GS4′s bills of material vs. the GS3, not all of those features being passed through pricing. Our initial analysis (to be refined post device’s tear-down) validates that the GS4 GM could be c. 300bps below that of the GS3. Operating margins however are partly determined by revenues, some costs being fixed. Taking into account our est. that the GS4 should outnumber the GS3 by >50% in first 12m of shipments, we est. only 100bps OM difference [...] we estimate GMs. close to 43% for the GS4 vs 46% for the GS3. This is considering software amortization costs as variable, which is not fully accurate. Again – we will revise this analysis post detailed tear-down analysis, but this is our first cut.

Assuming that eventually some of the margin difference will be made up in volume, writes Gaudois:

Over the first 12 months post launch, Samsung sold about 52.5mil GS3. We estimate the OM generated was close to 30%. If we were to assume same volumes for the GS4, then OM would be lower and close to 26%. However, weforecast the GS4 to significantly outship the GS3 and est. 81mil over 12 months. Assuming this, OM would be 29%. This is assuming 10% variable costs at the opex level and $2bn fixed opex.

Gaudois thinks the stock can get working again if there’s strong sell through of the S4, which would dissipate some margin concerns, he thinks. He also thinks investors will come around to the view that high-end phones are not everything, with cheaper models making up 14% of Samsung’s total group operating profit.

Gaudois raised his 2013 revenue estimate for Samsung to ₩246.08 trillion from ₩238.53 trillion, cut his operating profit from ₩42.57 trillion to ₩42 trillion, and trimmed his EPS estimate from ₩249,721 per share to ₩245,686 per share.

Gaudois’s report follows a report last Thursday from research firm Strategy Analytics that estimated that Samsung was number one in worldwide smartphone market share in Q1, with 33.1% of all smartphone shipments, up from 28.9% a year earlier, even as Apple‘s (AAPL) share slipped in the quarter. Samsung does not disclose smartphone unit shipments.

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